Working Paper: NBER ID: w21954
Authors: Takatoshi Ito
Abstract: Japanization is defined as a combinations of the following economic conditions: (1) the actual growth rate is lower than the potential growth rate for an extended period; (2) the natural real interest rate is below zero and also below the actual real interest rate; (3) the nominal (policy) interest rate is zero; (4) deflation, i.e., negative inflation rate. As a summary measure for these conditions, the Japanization index, the sum of proxy for GDP gap, inflation rate and the nominal interest rate, is proposed. The growth rate, the inflation rate and the nominal and real interest rate has been declining since 1990. Since 2009, major advanced countries have shared conditions (1)-(3). Only Japan has experienced a prolonged period of (4) deflation. A closer examination of how Japan got into the Japanization state reveals that it is a combination of (a) a hard-landing of the 1990-92 bubble; (b) not dealing with non-performing loans problem promptly and decisively, resulting in a major banking crisis; (c) the absence of a soft landing after the banking crisis; (d) the lack of quantitative easing policies when deflation first occurred; (e) the absence of an inflation target; and (f) the absence of timely, large scale fiscal stimulus. The fact that Abenomics—a mix of aggressive monetary policy, combined with a 2% inflation target and fiscal stimulus—in lifting the economy out of deflation shows it is possible to prevent or cure Japanization.
Keywords: Japanization; economic stagnation; deflation; Abenomics
JEL Codes: E43; E44; E52; E58; E61; E62; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| collapse of the asset price bubble in the early 1990s (E32) | banking crisis (F65) |
| banking crisis (F65) | prolonged stagnation and deflation (E31) |
| failure to address nonperforming loans promptly (F65) | exacerbated banking crisis (F65) |
| failure to address nonperforming loans promptly (F65) | prolonged economic stagnation (E66) |
| introduction of zero interest rate policies (ZIRP) (E43) | insufficient stimulation of demand (E41) |
| nominal interest rate being stuck at zero (E43) | deflationary environment (E31) |
| deflationary environment (E31) | real interest rates remain positive (E43) |
| real interest rates remain positive (E43) | suppressing economic activity (E64) |
| Abenomics (aggressive monetary policy, inflation target, fiscal stimulus) (E63) | improved economic performance (O49) |
| decline in Japan's nominal GDP from 1997 to 2009 (N15) | slow growth in real GDP and sustained deflation (E31) |